4th May 2020 - AUD lower, busy week of data as US-China ties eyed

Good morning

OVERNIGHT DATA AND HEADLINES

London, Tokyo and New York markets were all open on Friday, although much of Europe and Asia were closed for International Workers' Day.

U.S. manufacturing activity plunged to an 11-year low in April as the novel coronavirus wreaked havoc on supply chains, suggesting the economy was sinking deeper into recession. The ISM said its index of national factory activity dropped to a reading of 41.5 last month, the lowest level since April 2009, from 49.1 in March. The monthly decline in the ISM index was the biggest since October 2008. A reading below 50 indicates contraction in the manufacturing sector, which accounts for 11% of the U.S. economy. Economists polled by Reuters had forecast the index would fall to 36.9 in April.

Construction spending rebounded 0.9% in March, with gains in private and public outlays, after declining 2.5% in February. The report, however, likely does not fully capture the coronavirus-related business closures and disruptions that swept through the country beginning in mid-March.

U.S. President Donald Trump said his hard-fought trade deal with China was now of secondary importance to the coronavirus pandemic and he threatened new tariffs on Beijing, as his administration crafted retaliatory measures over the outbreak. Trump's sharpened rhetoric against China reflected his growing frustration with Beijing over the pandemic, which has cost tens of thousands of lives in the United States alone, sparked an economic contraction and threatened his chances of re-election in November. Two U.S. officials, speaking on condition of anonymity, said a range of options against China were under discussion, but cautioned that efforts were in the early stages. Recommendations have not yet reached the level of Trump’s top national security team or the president, one official told Reuters.

Wall Street took a nosedive on fears that the world's two largest economies could resume a trade war, dragging down a global stocks index. Dow Jones fell 622.03 points, or 2.55%, to 23,723.69, the S&P 500 lost 81.72 points, or 2.81%, to 2,830.71, and the Nasdaq dropped 284.60 points, or 3.2%, to 8,604.95.

The Bank of England said it will release the result of its next Monetary Policy Committee meeting at 7 a.m. (0600 GMT) on May 7, rather than at the usual release time of 12 p.m. "This is to accommodate the joint publication with the interim Financial Stability Report," the BoE said.

CURRENCIES

The USD remained under pressure, falling to fresh lows not seen since mid April. DXY index fell to 98.77 but managed a late comeback towards 99.10.

EUR stabilised against the USD, rising up towards 1.1019 from 1.0950 lows.

GBP fell from 1.2575 highs to 1.2483.

China’s CNY fell to a one-month low by 0.7% to 7.1350, its lowest since April 2.

The USD was down against the JPY, trading down 0.3% at 106.88.

AUD continued its selloff on Friday, falling by more than 1% from 0.6460 down towards 0.6410.

NZD followed lower, from 0.6090 to 0.6047.

AUDNZD was relatively unchanged from its previous selloff, rising to touch 1.0628 but falling back to 1.0590 in late trade.

AUDEUR encountered only selling interest overnight, down more than 100 points to touch a 0.5836 low.

TREASURIES

U.S. Treasury yields moved a little higher as the market looked ahead to next week's projection for U.S. borrowing in the second quarter to finance enormous stimulus efforts aimed at combating the economic fallout.

The benchmark 10-year yield was last up 1.4 basis point at 0.638%.

The two-year yield was 1.4 basis points higher at 0.202%.

The gap between yields on two- and 10-year Treasury notes was at 43.30 basis points, less than a basis point lower than at Thursday's close.

German bond yields fell further to 1-1/2- month lows - Germany's benchmark 10-year bond yields declined to as low as -0.57%, the lowest since mid-March.

Italy's two-year bond yields, which have been in focus given short-term risks from the coronavirus crisis, erased some gains and were down 8 bps at 0.56%.

COMMODITIES

Gold jumped more than 1%, shaking off initial losses, as risk sentiment soured on U.S. President Donald Trump's threat to impose new tariffs on China. Spot gold rose 0.9% to $1,695.21 per ounce.

Chinese iron futures ended higher, logging a monthly gain, as demand hopes improved after data showed manufacturing activity in the country expanded for a second straight month. The most-traded September iron ore contract on the Dalian Commodity Exchange closed up 2.5% at 610 yuan ($86.38) per tonne. It notched a monthly gain of 5.35%. Spot prices of iron ore with 62% iron content for delivery to China were unchanged at $84 per tonne.

Copper and other base metals prices fell sharply as a threat by U.S. President Donald Trump to impose new tariffs on China and bleak economic data added to pessimism over the demand outlook. Benchmark LME copper was down 1.6% at $5,108 a tonne and on track for a weekly loss of 0.7%.

Other metals: LME aluminium was down 0.5% at $1,487 a tonne, zinc fell 1.4% to $1,912.50, nickel slipped 2.1% to $11,935, lead lost 0.2% to $1,631.50 and tin was down 1.3% at $15,005.

U.S. oil prices were 5% higher while Brent crude rose above $26 per barrel, with both benchmarks posting their first weekly gain in four weeks as OPEC and its allies embark on record output cuts to tackle a supply glut due to the coronavirus crisis. Brent futures for July eased 4 cents, or 0.2%, to settle at $26.44 per barrel. U.S. WTI crude ended the session 94 cents, or 5% higher, at $19.78 after climbing above $20 earlier in the session.

AUD was dragged lower throughout Friday, falling to an eventual 0.6410 low as risk appetite faltered and the S&P500 ultimately closed down -2.8%.

Friday night’s move could be the first sign that US equities have already fully priced-in a meaningful economic recovery beginning later this year. If so, the equities rally might be over for now.

Commentary from U.S. President Donald Trump raising tariffs on China "certainly an option” in ways to retaliate for the spread of the coronavirus out of Wuhan, China added will continue to add an element in the risk off environment. "A lot of things are happening with respect to China. We're not happy, obviously with what happened. This is a bad situation -- all over the world, 183 countries. But we'll be having a lot to say about that. It's certainly an option. It's certainly an option," Trump told reporters.

Today in Australia we have Economic data releases with focus on the March dwelling approvals. Dwelling approvals jumped 20% in February on a 60% spike in unit approvals, concentrated in Vic. The picture was softer outside of high rise, private detached house approvals down 0.8% and low rise and medium density unit approvals about flat. March will see this spike unwind just as initial effects from the Coronavirus shut-down start to come through. The latter will be relatively small given that social restrictions only came into full effect in the last week of the month, with April set to register a much bigger drop. Markets are forecasting approvals to be down 15% in the month, noting that base effects mean the pull back in approval numbers is about a third bigger than the February spike, taking monthly approvals below their January level.

Overnight we have the final Eurozone PMIs with the weakness seen in the flash editions very likely to be confirmed. What matters far more for the EUR though is whether the number of virus infections increases again across Europe as lockdowns are gradually relaxed over the next few weeks. In the U.S. March data will be released via factory orders and durable goods orders (both expected to print record lows).

For the AUD, the recent pullback and rhetoric points to a reduction in prices to around 0.6200 by June.

US equities remain the single-biggest influence over AUD which is likely to remain the case this week despite a number of Australian economic data releases and an RBA policy decision on Tuesday.

AUD opens at 0.6405, cautious after the 1.55% drop on Friday on rising US-China tensions. A clear break of 0.6412 opens 0.6370-75; resistance seen at 0.6450-60, 0.6485-90.